Dividend Portfolio Sector Allocation Update

Several months ago I posted an update highlighting my dividend portfolio sector allocation. It’s always important to be aware of your portfolio allocation as at times, especially when building out a new portfolio or a particular sector experiences unusual strength or weakness, balances can fall out of alignment and you are faced holding a portfolio that is particularly overweight or underweight in a specific sector. Of course, if this was intended then nothing needs to be done to bring balance. However, most of these imbalances occur out of our control.

In recent months we have all seen the energy sector take a major hit in price as oil and other commodity prices have fallen from summertime highs to new annual lows. I find it interesting that many of the dividend growth bloggers have been writing how overweight they have become in recent weeks as seemingly every energy name has been picked up. Names such as BP, CVX, XOM, COP, TOT, RDS and others including BBL and NOV have been making the dividend blog rounds. Of course, this was all with good reason as new bargains could be found in previously relatively expensive stocks.

Below you will find my asset allocation for my dividend stocks. Clearly, I favor the consumer staples and industrial sectors the most. However, the past several months have seen me add to my financial holdings in WFC, AFL, CB and new positions in TD, BNS and RY in my ROTH account. It was my intention to increase my financial sector exposure as I have jumped from a portfolio weight of 10.68% to 21.32% since early September in my ROTH account. Other changes to the portfolio have been more muted with changes of only a few percentage points in the last three months.

Brokerage Account

Sector

Sector %

Market Value

Consumer Staples

25.66%

$27,737.87

Industrial Products

19.08%

$21,366.11

Medical

14.35%

$16,071.96

Finance

12.10%

$13,554.42

Utilities

7.37%

$8,258.37

Retail/Wholesale

5.91%

$6,622.71

Multi-Sector Conglomerates

5.41%

$6,057.07

Basic Materials

5.04%

$5,641.71

Auto/Tires/Trucks

2.92%

$3,271.44

Consumer Discretionary

2.16%

$2,424.83

ROTH Account

Sector

Sector %

Market Value

Consumer Staples

40.84%

$10,539.69

Finance

21.32%

$5,502.32

Industrial Products

19.50%

$5,033.37

Retail/Wholesale

8.92%

$2,302.27

Multi-Sector Conglomerates

5.80%

$1,496.02

Medical

3.63%

$935.70

How are your stocks allocated? What is your largest sector holding(s) and how do you feel about having a relatively high overweight sector in your portfolio? Please let me know below.

I don’t own any energy yet. I’m not against energy as a portfolio holding as I have owned Chevron in the past as well as KMP, ETP and EPD. When I decided to go into the dividend growth model I wanted to construct a very long term portfolio that wasn’t subject to extreme volatility as you have in energy. This is why you can see my portfolio is mainly defensive consumer staples and industrial names that, in general, are low beta names and quite frankly help me sleep at night. My portfolio performance and dividend growth has been completely satisfactory to me so far. As I have said in the past, I’m not against energy, MLPs and the like as I have quite a few of those names on my watch list. I just want to be careful when I buy into a more volatile sector. When I finally decide which stocks to buy for my portfolio I literally have the intention of not selling for a decade or two or even three. I cannot say that while holding energy names. For me an energy play seems more of a trade than a long term investment. Again, I want to stress that I’m not against the sector as I have owned those names in the past and have done quite well. It’s just that those investments were more “trades” than long term holdings I’ll be carrying for twenty or thirty years. It’s a similar reason I do not hold any tech names in my long term portfolio; too much volatility. Thank you for stopping by and asking your question. I hope I made some sense in my explanation.

Compared to the S&P 500 (and only listed are things that are +/- more than 3%), we are light on Financials, Industrials, and Utilities, and heavy on Consumer Staples and Energy. We probably have a lot higher percentage than most dividend growth investors in Information Technology since we have some, but it comprises 20% of the S&P 500, and we are comfortable holding things like AAPL, CSCO, IBM, and INTC, all of which pay decent dividends.

Always interesting to look at sector allocations. Thanks for the thought starter!
KeithX

It’s always interesting to see how another dividend growth portfolios compare to your own regarding sector investment. Like you, I am heavy in the consumer staples sector as I want to construct a very defensive long term dividend growth portfolio. I’m sure you noticed an absence of tech and energy in mine. Tech is something I won’t consider for a long term portfolio while energy I still would consider. I have given my reasoning in my response to Captain Dividend. I appreciate you sharing your sector allocation with us. Thank you for stopping by.

DivHut, I have to second Captain’s question. You’re one of the most vocal against folks who are taking advantage of the dip in oil prices to build positions or lower their cost basis in energy stocks, yet have no exposure whatsoever, and are arguably overweight in consumer staples. I can understand wanting a small position, but no exposure is more of a statement, especially given the size of your portfolio.writing2reality recently posted…Trades – International Business Machines (IBM) Purchase

Please see my response to Captain Dividend. Though I currently do not own any energy names in my portfolio I do have many names on my watch list and would consider buying a small position in the space. I just want to tread very carefully when buying into a volatile sector like energy for a long term portfolio such as my own. The reasoning for my heavy weight in consumer staples is for my need to sleep well at night and buy many defensive names. As I have pointed out, I have owned Chevron in the past as well as MLP names so I am not against these investments by any means. I just want to hold very conservative and defensive names that I feel I can hold on to for decades to come. Energy, like tech will be a very different space in the next ten or twenty years. Toilet paper, toothpaste, foods, medicine (Tylenol, Band Aid, Ensure), soaps and shampoos will probably remain unchanged during the same time. Thank you for commenting and please feel free to ask or question anything I post, buy or sell.

I think your SWAN mentality is a good one, and something that each investor has to answer for themselves. For me, I see value in a broader diversification, including Energy and a small bit of technology. Unlike technology, the energy sector, while volatile, is one that has been quite consistent in rewarding shareholders through the up and downs. Exxon Mobile is a classic example of one such company. Not too many companies have rewarded shareholders in the way that they have.

There’s no question about the long term success XOM or CVX have provided shareholders over the decades. I just caution the many dividend growth bloggers out there about the risks of jumping two feet in to a particular sector without giving some measure to sector allocation. Some investors have gone from 0% energy to 10% or even 25% weight in the sector in a matter of a few weeks. To me, that’s a bit dangerous for my conservative style of investing. To be sure, as you noted I have not ruled out energy by any means. Owning energy in the past and currently watching quite a few energy names I am definitely open to exposing my portfolio to the space. Thanks for the reply.

I guess the question any portfolio holder should ask is if he or she is happy with the current mix of stocks that are owned. It’s amazing that our entire dividend growth blogging community are all on the same journey headed in the same direction just with different vehicles to carry us there. The bottom line is that you have to be happy with your current mix of stocks. If you can sleep well at night and are getting the expected returns, then rejoice. Like my portfolio, I see that you too do not own any energy names. I am curious to know why that is. Regarding your financial exposure, at first glance it does seem a bit overweight, but as you mentioned your REIT holdings are thrown into that mix which I would characterize as a different sector holding. Insurance companies are also thrown into the financial sector title so you may be more diverse than a portfolio would actually show. Thank you for sharing your mix of stocks with us. I appreciate your comment.

I am happy with my current setup, I current have shares of BP but you’re right the energy sector isn’t where it’s at for fellow dividend investors.

There is too much uncertainly within the energy sector, the middle east needs it at a certain price, heaven forbid something environmental happens like the BP incident. Worldly issues affect it. Where as people don’t really think about their shampoo or toothpaste, they’ve probably used it for years and thats what they are used to. People don’t like changing products.

That’s one of the reasons I can think of why the dividend investing community doesn’t really care for the energy sector.

The key to any portfolio allocation is, as you mentioned, being happy with the current set up. There’s nothing wrong with owning energy or any sector for that matter as long as you know why you own it and can sleep well at night. As you know the energy sector is very volatile for many of the reasons you mention plus regular financial market reasons too. That is why I am cautious about buying into the sector for now. Believe me, I like many names in the space and my watch list has quite of few oil names listed so I am not against the space, just careful. Thanks for the reply.

It’s always important to know how diversified your portfolio is at any given time. Even the most balanced portfolios can be skewed in one direction or another because of stock strength or weakness. Thank you for commenting.

I have a more or less equal distribution by market weight at present (9% to 12% range for each sector); I really only use market weight to help pick stocks in weaker (cheaper) sectors. Though I think that percentage of dividend income per sector is perhaps a more meaningful weighting for me since I’m more interested in dividend income than total return.

That said, I think I’m going to reduce exposure to the financials sector as they don’t have a great track record of consistent dividend growth.

While sector weighting is important I agree with your assessment that dividend income per sector or even per stock is more meaningful since that is really what every dividend growth investor is after; passive income.

Financial names still remain strong and even at current levels provide some decent relative bargains. Of course, financial names include REITs, banks and insurance companies. I still like AFL and CB long term as my banks, WFC, TD, BNS and RY. The large Canadian banks did not cut any dividends during the financial crisis of 2008/09. That is very telling considering that WFC and many other U.S. banks all cut theirs. Thank you for commenting.

Thanks for sharing DivHut. Your portfolios are better diversified than I thought. Some parts…..like Consumer Staples, are represented like I thought they would be…..others like Energy and Utilities, are a much smaller percentage than I’d expect. My family’s portfolios don’t really have specific quotas…..they have target ranges for the different groups……and (like you I presume……those allocations vary somewhat depending on the values the broader market is offering up. No matter how you slice it, you’re doing well DivHut. Have a great week
-BryanIncome Surfer recently posted…Some Thoughts on Berkshire’s P&G, Duracell Swap

Thanks for sharing your thoughts regarding my portfolio sector allocation. I have definitely built up a very defensive, long term, dividend growth portfolio especially when compared to many of the dividend bloggers that are out there. No REITs or MLPs for me just yet. I prefer the stability of the defensive names rather than more volatile stocks for a long term holding. While I also do not have a set target for my portfolio allocation, I do have a general idea of how diversified and how weighted I’d like to be. Again, it’s all an estimate without a hard number that I adhere to such as, “I must be 5% in X, 10% in Y etc.” Thank you for stopping by.

I can understand you staying away from a sector if it is outside your comfort zone. Living in Houston, I probably feel more comfortable with the volatility inside the energy corridor. On the other hand I have been hesitant to start positions within the financial sector because of WaMu, Wachovia, Lehman, Bear Sterns, BOA, Citi, Merrill Lynch, AIG, Countrywide, and the countless other high flyers that were vaporized several years ago. I know that certain banks are supposedly bulletproof, but I am still skeptical to say the least.

The reality is that nothing is bulletproof in our world today. The most solid appearing companies have been brought down in years past which just highlights that every stock, no matter what sector or industry, entails some sort of investment risk. For all the financial sector bombs you mentioned, there are some great names including AFL, CB, TRV or TD, BNS, RY, BMO and CM to name a few that survived the financial meltdown just fine. My eyes are still open to the energy sector as I’m not against owning a name in the space. I just want to be careful before I buy. Thank you for stopping by and commenting.

I have added quite a few energy names to my watch list in recent weeks as the price of oil declined. I just have not made a buy yet. I’m just being cautious, though some might say too cautious in that regard. With my two accounts, I treat them as two separate portfolios each with their own diversity and sector allocation. This is why I list them separately. Thank you for stopping by and commenting.

DivHut,
I understand where your coming from when putting a post like this together. The only energy name I have is BBL as of last week. I only own a few shares and would like to own only a small amount of energy stocks because I dislike the volatility. The yields are looking great so I may add more to BBL and possibly xom. It comes down to would I rather invest in a company that might continue dragging my portfolio, or invest in a winner like DIS. I need to protect my hard earned money but I underatand taking minimum risks are ok.

I want to continue to stress the point that I’m not against energy just because I do not hold any names in my portfolio. I have owned Chevron, KMP, EPD and ETP in the past, I just want to be careful when entering this sector at this juncture. Many of the popular energy names are already on my watch list and as the yield on many of these names continue to climb higher and tempt me I may just end up pulling the trigger on something. Like you, I too want to protect my hard earned money. I’m risking it already just by investing in the stock market. I just want to mitigate any other risks that may arise from my potential holdings. Thank you for commenting.

I think you are not alone in sharing an overweight in the energy sector. The oil patch has been very popular in recent weeks as commodity prices all fell and seemingly every dividend growth blogger has been picking up shares in the space. Nothing wrong about doing that, especially since newer values have been created in energy, I just caution at how rapid people deployed new cash into a falling sector. Thank you for sharing your portfolio breakdown and your ideal weighting as well.

Thanks for sharing your allocation, it’s very interesting! Do you have any plans on what you want your ideal asset allocation to look like? Or if not, do you have your eyes set on investing in a particular sector soon?

I do not have any hard numbers for an “ideal” portfolio balance. All I know is that I prefer to be heavier in consumer staples and industrial names without a specific weight in mind. This is how I built up my portfolio over the years. If I see a lagging weight in a particular sector I just add more to it. Thank you for commenting.

DivHut, funny you should post this as I was just reading some stock news today and thinking about my dividend portfolio and realizing I’m short in being fully diversified as I’d like. So thanks to this post I figured it out and here is what I found:

I’m still compiling my portfolio and these sector definitions are according to Scottrade. I just pulled out the REITs from “Services”. They have retail and telecom as part of services as well. Before figuring out my actual diversification I thought I needed Basic Materials, Healthcare, and Utilities. Looking at it now, I’m fairly happy at the level of diversification. I’d still like to add perhaps some Basic Materials, but haven’t really found any companies in that sector that I’m too thrilled with. Well thanks for the thought provoking post, as usual.

I have to say that your portfolio balance and diversification looks quite nice. You definitely have a healthy and diverse mix of sectors that is not overwhelmingly skewed. I would like to add some health REITs to my portfolio. I have several names I am looking at such as HCP, VTR and OHI to name a few. I also see that your energy holdings are still in line with the rest of your portfolio. I know in recent weeks many dividend bloggers have really seen their energy sector holdings grow much larger because of oil price declines. Thank you for stopping by and sharing your portfolio sector allocation.

Thanks for your thoughts, especially since you’ve been doing this longer than I have. I really like OHI, which I own shares of, they’ve been good to me thus far. I’ve also looked at HCP, and have not heard of VTR, or do not remember. I think these sort of REIT’s are a great investment for the long term. As for energy, I’m not going to increase my holdings in that sector. I think I got my bases covered in that area. Thanks again.

No problem. I think it’s important to remember that portfolio sector allocation is not a fixed number nor should it be. If anything, it’s a rough guideline that individual investors need to be aware of and follow. I agree that health REITs do offer a seemingly good long term investment. I have a feeling there will be a lot more consolidation in the space as well. Thanks for the reply.

This was a timely post. I’m very overweight financials and technology. Rather than sell or rebalance, I’m looking to add more consumer discretionary, services and healthcare. Also temporary overvaluation can push up asset allocation, but it shouldn’t mean a reason to sell to rebalance….the markets will probably take care of that by eventually correcting themselves.Integrator recently posted…My 2015 Goal : Do Nothing

I fully agree with your comment that just because certain sectors become overweight it is not a reason to sell those positions to re-balance. For myself, portfolio allocation is more of a very general guideline that I follow and by no means written in stone rules. Like you, if a certain sector becomes too overweight I simply add to alternative sectors to balance. Thank you for sharing your thoughts.